Foreign Direct Investment and Productivity: A Cross-Country, Multisector Analysis

Abstract

This paper adopts a cross-country, multisector approach to investigate the intra- and inter-industry effects of foreign direct investment (FDI) on the productivity of 15 emerging market economies in 2000 and 2008. Our main finding is that intra-industry FDI has a large positive effect on total and “exported” labor productivity. The effects of FDI on total factor productivity are much more elusive, both in statistical and economic terms. This result suggests that foreign firms raise the performance of their host economies through a direct compositional effect. Foreign firms tend to be larger and more input intensive and have greater access to foreign markets than domestic firms. Their greater prevalence mechanically increases average labor productivity and export performance.

Keywords

• foreign direct investment
• productivity
• sector level
• services